The Need For Nigerian Investment In Renewable Energy

Nigeria’s
installed electricity capacity is 12,522MW, well below the current demand of
98,000MW. The actual output is about 3,800MW, resulting in a demand shortfall
of 94,500MW throughout the country.3 As a result of this wide gap between
demand and output, only 45% of Nigeria’s population has access to electricity.

This
power deficit has also weighed negatively on business operations in the
country. Users must seek alternative energy means, primarily through buying gas
and diesel-powered generators. These alternatives are relatively expensive, and
most businesses that use them incur high production costs.

Besides
curtailing domestic business activities, the poor capacity of electricity in
Nigeria deters foreign direct investment inflows into the country, as investors
are typically weary of high electricity costs and shortages. Nigeria’s
total electricity mix is largely dominated by non-renewable energy despite a
vast potential in renewable sources.

The
exploration and adoption of these through private investments, offer a probable
solution to the power challenges in the country. Attracting private sector
investment into this area demands business-friendly measures such as lower
interest and tax rates.

Electricity generation
in Nigeria

Electricity
generation for Nigeria’s grid is largely dominated by two sources -
non-renewable thermal (natural gas and coal) and renewable water or hydro. Coal
and natural gas make up the largest portion of energy production in Nigeria,
while energy generated from hydro is well below potential.

Nigeria
depends on non-renewable energy despite its vast potential in renewable sources
such as solar, wind, biomass and hydro. The total potential of these renewables
is estimated at over 68,000MW, which is more than five times the current power
output.

The
exploration of these potentials and the production of renewable energy on a
large scale would significantly increase Nigeria’s electricity grid and ease
power shortages in the country. Electricity created from renewable sources is
cleaner, more efficient and more easily replenished.

Spurring investment in
renewables

Nigerian
governments have made efforts towards renewable forms of electricity in the
country. For instance, in 2006, the Ministry of Environment implemented the
Renewable Energy Master Plan (REMP), which was a strategy that aimed to
increase the contribution of renewable energy to Nigeria’s total energy
production by 2025.

The
plan was produced with the support of the United Nations Development Programme
(UNDP). In 2015, the current administration drafted the Nigerian Renewable
Energy and Energy Efficiency Policy (NREEEP), which focused on harnessing
alternative energies such as hydro, solar, wind and biomass.

This
policy indicated that hydropower is the most important renewable energy source
to be developed to harness the country’s full potential. Despite these plans,
there has been no significant addition of renewables to the national grid.
Total power output remains between 3,500MW-3,800MW, with nonrenewable sources
accounting for 80%-85%.

The
government’s inability to achieve its objective is largely due to a weak
commitment to the proposed plans. In line with the power sector privatization
objectives, the government could consider luring private investors into the
renewable energy space.

Private
investors, as complementary agents in a mixed economy, could overcome the
government’s flaws and achieve more significant results if the federal
government shows more of a commitment. A Chinese firm, Shenzhen Kang Ming Sheng
Technology Industry Incorporation, has already pledged to invest in Nigeria’s
renewable energy and with business-friendly reforms, Nigeria is likely to see
more of this.

Two
key reforms that would be foundational to incentivizing the private sector in
investing in renewable energy are cheaper financing and lower taxes. Lending
rates in Nigeria (currently at an average of 17.5%) are too high for investors
who require capital to start up businesses such as in renewable energy.

Countries
such as China, the US and India, which are leading the renewable energy
revolution, offer substantially lower rates. The average commercial bank
lending rate in India, for example, is about 9.45% pa. In the US and China the
rates are at an average of 4.3% pa. The Nigerian government has made
concessions for other sectors, enabling cheaper financing to agriculture and
manufacturing in order to encourage their growth.15 While the monetary policy
rate is unlikely to reduce lending rates in the near term, the government might
consider offering similar lower rates to power sector investors, particularly
for those who are investing in renewable energy.

In
the US, lower rates for financing are complemented by tax concessions.
Nigeria’s corporate tax rate of 30% is one of the highest in the world.16
Bearing in mind that a new firm investing in the renewable energy sector might
find it difficult to recover its initial capital outlay at the beginning of
operations. A staggered tax rate could provide incentive for such
investment.

The
Nigerian government needs to make investment into renewable energy more
attractive to private investors in line with its privatization objective.
Increased power supply from renewable sources will ease the country’s power
challenges. An increased power output would also be favorable for the growth of
other businesses and the viability of the country’s environment to other
foreign direct investors. However, the negligence of the country’s renewable
energy potential suggests that power output will remain below optimal, and this
sub optimality will remain a significant constraint to economic activities in
the country unless clear action is taken.